Can The Market Hold Up Despite Tech Weakness?
The “rest of the market” was very resilient last week in the face of intense tech weakness, as the
Nasdaq fell 2%, but despite the heavy weighting of tech stocks, the S&P 500 only slipped 0.10%,
thanks to the strong performance of the rest of the market. To that point, the equal-weight S&P 500
ETF (RSP) rose 2.11% and, more granularly, eight of the 11 sector SPDRs were higher last week!
Looking forward, the key is whether the rest of the market can hold up despite tech weakness, and
we addressed this point back in mid-November and identified the key variable that history implies
will decide if that answer is “yes,” the rest of the market can hold up, or “no,” it can’t.
History suggests it’s unlikely, but it is possible. Over the past three years, the Nasdaq has
declined by more than 10% on three occasions during extended trading periods (which I define as
several weeks). Essentially, these have been the three pullbacks/corrections in the extremely
strong tech bull market. In two of those instances, July 2023-October 2023, and February 2025 until
April, the rest of the market did not hold up when tech fell.
In both instances, the tech-heavy QQQs fell 10.5% and 23%, respectively, while the equal-weight S&P
500 ETF (RSP) declined 13.2% and 16.4%. Point being, diversifying away to the rest of the market
didn’t really matter. However, there is one instance, early July 2024 until early August 2024,
where the rest of the market held up. During that period, QQQ fell 12.5%, while RSP was essentially
flat. In that instance, the declines in tech were driven by underwhelming Q2 earnings and broader
concerns about economic growth (the labor market data got soft, and inflation rose). That
stagflation environment hit the most expensive/highest flyers the hardest, while more
value-oriented sectors held up and offered significant outperformance. Bottom line, if the concerns
about tech are singularly focused on that sector (which so far, they are) and we get a mild
stagflation impulse that pressures richly valued stocks, history does somewhat imply RSP can
outperform.
With that in mind, we are underweighted in tech-heavy stocks and overweighted in bonds
and growth.
Source: Sevens Report 2-9-26